Preserving Arbitration: Excising Unilateral Opt-Out Clauses and the Limited Scope of Section 11 Review under the SARFAESI Act

Introduction

The Bombay High Court’s decision in Tata Capital Limited v. Vijay Devij Aiya & Anr. (Commercial Arbitration Application Nos. 237 & 243 of 2024, pronounced April 22, 2025) addresses a recurring conflict in loan agreements containing arbitration clauses with built-in “opt-out” rights for financial institutions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”).
The applicant (Tata Capital Limited) sought the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”), while the respondents opposed on the ground that an identical clause had been declared void for want of mutuality by a Division Bench of the Delhi High Court in Tata Capital Housing Finance Ltd. v. Shri Chand Construction & Apartments Pvt. Ltd. (“Tata Capital Delhi HC”).
This commentary examines the background, key issues, and judicial reasoning of the Bombay High Court’s ruling, highlighting its new precedent: the excision of unilateral termination/amendment rights from arbitration clauses while preserving the parties’ core agreement to arbitrate, and the reaffirmation of the limited scope of Section 11 review.

Summary of the Judgment

1. The Court noted that Clause 12.18 of the January 31, 2016 and October 31, 2017 loan agreements provided (a) a clear mutual agreement to arbitrate in Mumbai, and (b) a non-obstante unilateral right for the lender (Tata Capital) to terminate the arbitration agreement if it came under the SARFAESI/DRT Acts.
2. The respondents relied on the Tata Capital Delhi HC decision to argue that the unilateral opt-out destroyed the arbitration agreement’s mutuality, rendering it void. They also urged that the applicant had elected enforcement under the SARFAESI Act and allowed a prior arbitration to lapse.
3. The Court held that the Tata Capital Delhi HC precedent arose in the narrow context of a Section 8 application where the lender had taken inconsistent steps (seeking suit relief then reversing to arbitration). It was not binding on a Section 11 reference focused solely on the existence of an arbitration agreement.
4. Citing MD Frozen Foods v. Hero Fincorp Ltd., the Court reaffirmed that remedies under SARFAESI/DRT Acts can run in parallel with arbitration and do not extinguish the arbitration agreement.
5. Following the Supreme Court’s “Interplay” decision and subsequent authority (SBI General; Patel), the Court emphasized that under Section 11(6A) its task is confined to verifying the formal existence of an arbitration clause, leaving substance and jurisdictional challenges (including mutuality or unilateral rights) to the Arbitral Tribunal under Section 16.
6. The applications were allowed: Mr. Sandeep H. Parikh was appointed sole arbitrator, and procedural directions were issued.

Analysis

Precedents Cited

• Tata Capital Housing Finance Ltd. v. Shri Chand Construction & Apartments Pvt. Ltd. (2022 (1) ARB LR 213): Held a unilateral opt-out clause void for lack of mutuality in a Section 8 context.
• MD Frozen Foods v. Hero Fincorp Ltd. (2017 16 SCC 741): Clarified that parallel pursuit of SARFAESI remedies does not terminate arbitration rights.
• In Re: Interplay Between Arbitration Agreements … & Stamp Act, 1899 (2024 6 SCC 1): A seven-judge decision limiting Section 11 courts to examining only the formal existence of an arbitration agreement.
• SBI General Insurance Co. v. Krish Spinning (2024 SCC OnLine SC 1754): Reinforced the “Interplay” ratio on Section 11’s confined scope.
• AJAY MADHUSUDAN PATEL v. JYOTRINDRA S. PATEL (2024 SCC OnLine SC 2597): Reiterated Section 11/16 demarcations and the tribunal’s primary role in substantive jurisdictional disputes.

Legal Reasoning

• Contextual Distinction: The Court observed that the Tata Capital Delhi HC decision turned on a litigant’s self-contradictory conduct—suit prosecution followed by belated arbitration calls—unlike the present application which sought arbitration from the outset.
• Excising Unilateral Rights: Drawing analogy to the excision of unilateral arbitrator-appointment rights (now universally invalid), the Court indicated that a unilateral opt-out clause can be similarly severed, preserving the parties’ core arbitration commitment.
• Limited Section 11 Mandate: Under Section 11(6A), the Court’s jurisdiction is confined to formal existence and execution of an arbitration agreement. Any existential challenge (e.g., mutuality, effect of opt-out) is reserved for the arbitral tribunal under Section 16.
• Parallel Remedies: MD Frozen Foods establishes that invoking SARFAESI/DRT Acts is a concurrent right and does not amount to election or waiver of arbitration, nullifying the respondents’ election-based objection.

Impact

• Courts will be reluctant to void arbitration agreements for unilateral opt-out clauses when parties have unequivocally consented to arbitrate, choosing instead to excise offending provisions.
• Section 11 tribunals will focus strictly on the clause’s formal existence, deferring substantive challenges (mutuality, opt-out validity) to arbitration under Section 16.
• Lenders and borrowers in financial disputes will gain certainty that arbitration clauses with SARFAESI/DRT-related provisions remain enforceable, provided core mutual agreement exists.
• Lower courts will follow the excision approach, aligning with the Supreme Court’s broader pro-arbitration jurisprudence.

Complex Concepts Simplified

• Section 11 Application: A petition to a court for the appointment of an arbitrator when parties cannot agree on one.
• Section 16 Challenge: Raises the tribunal’s jurisdictional objections—existence, validity, scope of the arbitration agreement.
• Non-obstante Clause: A provision stating that it overrides any conflicting legal provision.
• Mutuality: Requirement that both parties must stand on equal footing—one party’s rights cannot unilaterally undermine the other’s.
• SARFAESI/DRT Acts: Special statutory regimes allowing secured creditors to enforce or recover debts outside regular judicial processes.

Conclusion

The Bombay High Court’s ruling in Tata Capital v. Vijay Devij Aiya cements two pivotal principles: (1) arbitration clauses tainted by unilateral termination or amendment rights can be cured by judicial excision, preserving parties’ agreement to arbitrate; and (2) courts under Section 11 are confined to verifying the formal existence of an arbitration agreement, relegating deeper challenges of validity or mutuality to the arbitral tribunal under Section 16. This decision reinforces India’s pro-arbitration stance and provides clarity for commercial parties navigating parallel statutory enforcement remedies under the SARFAESI and DRT Acts.